Posted by: Steve Hamm on June 1, 2006

A year and a half ago, when I first met SugarCRM CEO John Roberts, he was a fresh-faced young guy full of excitement about how open source software was going to transform the corporate applications markets. His company was only six months old at the time. Roberts dropped by earlier this week, and, while his forecast hasn’t come true yet, his company certainly has come of age. Sugar, arguably the first open source application designed for corporations, now has more than 600 paying customers with 10,000 users. About 90,000 people are using the free version. SugarCRM has always operated in the shadow of Salesforce.com, but, over time, it could cause real trouble for the better-known company.

Salesforce.com is the leader in on-demand customer-relationship management software. It now has 22,700 customers and 444,000 subscribers. But last quarter's subscription additions of 45,000 fell off from 48,000 the previous quarter, and the company's high marketing and R&D costs pushed it into the loss category. "We are having an impact on Salesforce.com. Their growth is slowing. Why? It's because we're gaining ground among the same potential customers," says Roberts.

He sounds like Salesforce.com CEO Marc Benioff did a few years ago when he predicted the demise of then-CRM-leader Siebel Systems. Cheeky. Benioff was right, though. Will Roberts be, too? I don't think SugarCRM will kill Salesforce.com, but, over the long haul, SugarCRM's business model and technology could prove superior--and it could become a significant competitor.

Here's what SugarCRM has going for it: It's open source, so it gets product development and bug fixing help from a community of developers outside its walls. Rather than spending a lot of money on marketing, it spreads virally. For instance, it has 100 customers in Europe despite not having a single employee there. Also, it offers customers the choice of running the software themselves on their own servers or having it delivered to them on demand. In the hosting mode, SugarCRM runs its applications on a cluster of inexpensive Linux servers, and uses the MySQL open source database. Cheap. Cheap. Salesforce.com uses quite a bit of open source software, but runs its core application on expensive Sun servers and the Oracle database. "This is the future of software," predicts Robers. "I don't believe that by itself on demand is the future of software."

An issue for both Salesforce.com and SugarCRM is how well they integrate with other applications. Roberts is trying to best Benioff in that area, as well. Three months ago, he announced a deal with Microsoft to tune his products to work well with Microsoft's. Now he's working on the same kind of deal with corporate software giant SAP.

Roberts has been laboring in the CRM vineyards for 14 years--earlier at E.piphany, BroadVision, Baan, Aurum, and IBM. Maybe, this time, he got it right.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.